India: Evolution Of Arbitration In India

"Differences we shall always have but we must
settle them all, whether religious or other, by arbitration."
- Mahatma Gandhi

The industrial revolution has led to rapid escalation in global
trade and commerce. To correspond with the economic growth and
avoid prolonged litigation, the parties resort to arbitration as
the preferred dispute resolution mechanism. Not only in India but
cohesive global growth strategies and economies have realized that
arbitration happens to be a favourable way out for all. Cross
border transactions and bilateral trade relations have fostered
affiliations between countries thereby increasing legal
intricacies. Needless to say, disputes have also become inevitable
and there is a demand for methodology to expedite legal
remedies.

The earliest evolution of arbitration can be traced back to the
era when King Solomon during his rule followed the biblical theory
when he settled the issue between two mothers where each one was
claiming the right on the baby boy and the issue was who the true
mother of a baby boy1 was. Thereafter, arbitration was
used by the rulers to settle territorial disputes and also for
commercial disputes. According to historical references,
arbitration has been in place even before the times of Christ.
There has been references that prove the same. For instance, the
Arabic word for arbitration is Tahkeem and
arbitrator is Hakam. Similarly, in case of Persian
language, an arbitrator is called as Salis and the
party to same is known as Salisee. Moreover, the
first law for arbitration came into force in England in the year
1697.

Hindu Law: Glimpse into ancient Arbitration

As per the Hindu Law, one of the earliest known treatise that
mentions about arbitration is "Brhadaranayaka
Upanishad"2. It elaborates about the
various types of arbitral bodies which consists of 3 primary bodies
namely 'Puga' the local courts,
'Srenis' the people engaged in the same business
or profession and the 'Kulas', who were members
concerned with the social matters of a particular community and all
these three bodies were cumulatively known as Panchayats. The
members of the same were the Panchas, the then arbitrators, used to
deal with the disputes under a system, we now refer to as
Arbitration.3 It has been seen that the disputes which
were referred to the Panchas and the courts have been duly
recognised and have received credence to the awards passed by them.
The same was observed by the Privy Council in the case of Vytla
Sitanna vs. Marivada Viranna4.

The Modern Arbitration Law was enacted in India as early as 1772
by Bengal Regulation Act of 1772. This was a result of successful
resolution of disputes amongst parties by choosing a tribunal.
Thereafter, the same was promulgated to other presidency towns
namely Bombay and Madras through Bombay Regulations Act of 1799 and
Madras Regulation Act of 1802.

Birth of India's 1st Legislative Council

The 1st Legislative Council for India was formed in 1834,
followed by the First Indian Arbitration Act on 1st July, 1899. It
came into force and said act was fundamentally based on British
Arbitration Act, 1889 but the application of the Indian Arbitration
Act was confined only to the presidency towns' i.e Calcutta,
Bombay and Madras. A unique feature in the Act was that the names
of the arbitrators were to be mentioned in the agreement, the
arbitrator at that point can also be a sitting judge, as was in
Nusserwanjee Pestonjee and Ors. v.Meer Mynoodeen Khan Wullud Meer Sudroodeen Khan
Bahadoor5. In the case of Gajendra Singh vs.
Durga Kunwar6 it was observed that the Award as
passed in an arbitration is nothing but a compromise between the
parties. In Dinkarrai Lakshmiprasad vs. Yeshwantrai
Hariprasad7, the Hon'ble High Court observed
that the said Indian Arbitration Act, 1889 was very complex, bulky
and needed reforms.

Arbitration Act 1940 – Unveiling Controversies

Under the British Regime a more specific arbitration act was
enacted on 11th March 1940, which came into force on 1st July 1940.
termed as 'The Arbitration Act, 1940'. It was applied to
the whole of India (including Pakistan, Baluchistan)8.
The same was modified vide an ordinance, post Independence.

The Act of 1940, was referred to many disputes but the same was
also under many criticisms. In some of the cases, it was observed
that the Arbitration Act, 1940, distinguishes between an
application for setting aside an award and one for a decision that
the award is a nullity. This implies that it does not legally exist
and contemplates that an application for setting aside an award may
be made under Section 30 and an application of that award is a
nullity under Section 33. Further, it was also observed that the
said act fails in recognizing that the arbitration will fail
in-case of non-existence and invalidity of an arbitration
agreement9.

The Act was silent about the shortcomings inherent in individual
private contracts. The rules providing for filing awards differed
from one High Court to another. The lack of provisions prohibiting
an arbitrator or umpire from resigning at any time in the course of
the arbitration proceedings, exposed the parties to heavy losses
particularly where the arbitrators or umpire acted mala fide. It
was also seen that if an arbitrator appointed by the Court dies
during the arbitration proceedings, there was no other provision in
the said act for appointment of a new arbitrator, which was also
seen as a major flaw in the 1940 Act10. Another concern
in the act was that the Marginal Notes were not regarded as part of
an Act11.

Enforcement of the Arbitration Act, 1996

The Arbitration Act of 1940 had been facing a lot of criticisms
and lacked in quite a lot of areas when it came to implementation
in the real sense. Although it brought uniformity in law across the
nation, it needed to be replaced by The Arbitration and
Conciliation Act 1996, which came into force from 22nd August 1996.
The basic intent of the legislation was to provide for a speedy
solution to disputes between the parties and also to limit the
judicial intervention. The main intention of the Legislation was
primarily to cover the international and domestic commercial
arbitration and conciliation. It was also to make the arbitral
tribunal fail, provide them reasons to pass awards, minimize the
role of courts, enforce the arbitral award as the decree of the
court.

In certain cases, there arose a dispute between the parties and
applications were filed before the enactment of the 1996 Act but
the arbitrators were appointed after the enactment. In such a given
scenario, the arbitrators and the parties also agreed that the
proceedings for the said dispute will be governed by the New
Law.

The Act of 1996 consolidated and amended laws relating to
Arbitration, International Commercial Arbitration and also for
enforcement of the Foreign Arbitral Awards. Initially, in the Act
of 1996, it was held that the Court can pass interim orders under
Section 9 of the Act, where Section 9 contemplates two stages,
firstly, court can pass order during arbitral proceedings and
secondly, that court can pass order before commencement of arbitral
proceedings12.

The Arbitration Act, 1940 vs.1996 – Contrasting
Scenarios

The basic difference in 1940 and 1996 Act was that in the former
one a party could commence proceedings in court by moving an
application under Section 20 for appointment of an arbitrator and
simultaneously could also move an application for interim relief
under the Schedule read with Section 41(b) of the 1940 Act. The
later one does not contain any provision similar to Section 20 of
the 1940 Act but the court can pass orders even before the
commencement of the arbitration proceedings. Another difference was
that in the former act, there was no requirement to give reasons
for an award until and unless agreed by the parties to arbitration.
However, in the later Act, the award has to be given with reasons,
which minimized the Court's interpretation on its own. There
were changes with respect to the award passed by the arbitral
tribunal in the 1940 and 1996 Act.

The 1996 Act since its enactment faced many challenges and the
Courts brought out what was actually intended by the Legislation,
the Courts clarified the said Act and the intention by various
landmark judgments. In particular, the landmark case of Bharat
Aluminium Co., saw at least three phases before the Hon'ble
Supreme Court of India since the year 2001 till now i.e 2016
carrying from two Hon'ble Judges to the Constitution Bench.

In the first case, the Hon'ble Supreme Court was of the view
that Part I is to apply also to international commercial
arbitrations which take place out of India, unless the parties by
agreement, express or implied exclude it or any of its provisions,
it was also held that the Arbitration Act of 1996 was not a well
drafted act and had some lacunas13.

The Second Round of Amendments in 2005

The second round14 started around 2005, when there
was a difference of opinion between the two Hon'ble Judges of
the Hon'ble Supreme Court of India and the said matter was
thereafter, placed before a three Judge Bench, which by its order
directed the matters to be placed before the Constitution Bench.
The Constitution Bench was of the view that Section 2(2) makes it
clear that Part I is limited in its application to arbitrations
which take place in India and that the Parliament by limiting the
applicability of Part I to arbitrations which take place in India
has expressed a legislative declaration. The Bench further went
ahead with a distinction between the arbitration in India and
outside India. It held that Section 2(2) merely reinforces the
limits of operation of the Arbitration Act, 1996 to India and it
was further held that if Part I of the Act were applicable to
arbitrations seated in foreign countries, certain words would have
to be added to Section 2(2). The section would have to provide that
"this part shall apply where the place of arbitration is in
India and to arbitrations having its place out of India."

Another interesting question which was considered was whether
Section 2(2) is in conflict with Sections 2(4) and 2(5). It was
held that the language as used by the legislature in Sections 2(4)
and 2(5) of the 1996 Act, means the arbitration, that take place in
India. It was further clarified that the provision does not admit
an interpretation that any of the provisions of Part I, would have
any application to arbitration which takes place outside India. The
1996 Act, was basically designed to give different treatments to
the awards made in India and those made outside India. The
distinction is necessarily to be made between the terms
"domestic awards" and "foreign awards". It was
also clarified that Part I and Part II are exclusive of each other
and the same is also evident from the definitions. The issues
relating to the interim reliefs in an Inter-Parte Suit filed by the
parties pending arbitration was held to be non-maintainable, as the
pendency of the arbitration proceedings outside India would not
provide any cause of action for a suit where the main prayer is for
injunction.

Third Round of Amendments in 2015

The question as to whether part I of the Arbitration and
Conciliation Act, 1996 would apply to foreign arbitrations was
first examined by the Hon'ble Supreme Court of India in a
celebrated judgment by a three Judge bench in the year 2002 titled
Bhatia International vs. Bulk Trading SA1 ("Bhatia
International"). The core issue before Hon'ble
Supreme Court was the interpretation of Section 2(2) of the
un-amended Act which stated that, "This Part shall apply where
the place of arbitration is in India." The Hon'ble Apex
Court had compared the said provision with the UNCITRAL Model Law2,
which clearly stated in its preamble that, "the provisions of
this Law... apply only if the place of arbitration is in the
territory of this State."

The Hon'ble Supreme Court of India in the case of Bharat
Aluminum and Co. vs. Kaiser Aluminium and Co.3 (BALCO) had
reconsidered the law laid down in Bhatia International and
overruled the same. In the landmark judgment pronounced by the
Constitution Bench of Hon'ble Supreme Court of India on
September 06, 2012 it was concluded that "Part I of the
Arbitration & Conciliation Act, 1996 is applicable only to the
arbitrations which take place within the territory of
India".

The Hon'ble Apex Court had observed as under:

"In our opinion, the provision contained in Section 2 (2)
of the Arbitration & Conciliation Act, 1996 is not in conflict
with any of the provisions either in Part I or in Part II of the
Arbitration Act, 1996. In a foreign seated international commercial
arbitration, no application for interim relief would be
maintainable under Section 9 or any other provision, as
applicability of Part I of the Arbitration & Conciliation Act,
1996 is limited to all arbitrations which take place in
India".

Only those cases in which agreements stipulate that the seat of
the arbitration is in India or on whose facts a judgment cannot be
reached on the seat of the arbitration as being outside India would
continue to be governed by the said principle.

Even the world's two most prominent countries (India and
Pakistan) also agreed to refer the dispute to Arbitration and had
referred the dispute relating to the Indus Water Treaty
196015 to The Permanent Court of Arbitration. This move
clarified and supported the importance of arbitration globally.

With the economic growth of the nation, the foreign entities
started business through their 100% subsidiaries. Eventually, an
exciting question of law came for consideration before the
Hon'ble Apex Court16 which was whether it is
permissible under the Arbitration Act, 1996 for two Indian
Companies to agree to refer their commercial disputes to a place of
arbitration outside India with governing law being English law. It
was observed that as one of the entities indirectly involved in the
matter is a foreign entity, therefore, there is some foreign
element and secondly, as Section 28(1)(b) of the 1996 Act expressly
recognizes such autonomy to choose the governing law, therefore the
said clause is valid.

The 2015 Act can be looked as a boon for the party who succeeded
before the arbitral tribunal, as in the earlier act of 1996 if the
award passed by the arbitral tribunal was challenged before the
court, even on issuance of notice by the court would tantamount as
a stay but by virtue of the amendment in the 2015 Act, a specific
stay has to be granted.

It is to be noted that not all matters/disputes can be referred
to arbitration even if the agreement/contracts etc. contain an
arbitration clause, its being noted that the disputes relating to
Trust, trustees and beneficiaries arising out of the Trust Deed and
the Trust Act are not capable of being decided by the
arbitrator17.

Focus on the 'Public Policy of India'

The interpretation of the word "Public Policy of
India" was sought to be narrowed by the said Amendment
with the intention to give importance to the award of the arbitral
tribunal and accord finality to the same, which was avowed
intention of the 1996 Act. It was also recommended and accepted
that the arbitration proceedings have to start within a period of
maximum 90 days by the party obtaining any interim order from the
court. The amendment also restricted the courts' interference
in any arbitration proceedings. By virtue of the said amendments,
no application was allowed or would be entertained by any court in
a matter where arbitration proceedings had already commenced.

The amendment also confirmed that any interim orders passed by
the arbitral tribunal are enforced effectively, as the said interim
orders which were passed at the time of 1996 Act were not
effectively enforced since the provisions of Civil Procedure Code
were not made specifically applicable to them.

Summing Up

It is evident that arbitration has evolved over the years as the
ideal tool for resolution of disputes that saves the court's
time and largely instrumental in assisting the parties to resort to
quick remedial measures. Every arbitration is based on insightful
application of law and its evolution is proof of its significance
in the actual proceedings. Thus, arbitration has emerged as the
most preferred platform for quick resolution of disputes especially
in the industrial and the corporate realm.

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